Reinvention of a geek emphasizes innovation, high-margin markets

BenjaminPimentel

This was evident one recent afternoon in a conference room at Dell’s
DELL
headquarters just outside of Austin when he picked up a reporter’s outdated digital audio device and casually identified it: “IRiver — haven’t seen one of those in a long time.”

Then there was the time when Dell offered another visitor a look at the company’s latest wireless module.

Dell Inc.
2011
at a glance

CHIEF EXECUTIVe

Michael Dell

HEADQUARTERS

Round Rock, Texas

Market cap

$28 billion

stock performance

+11%

revenue, LATEST QUARTER

$15 billion, -19%

net income

$893 million, +9%

number of employees

105,000

cash on balance sheet

$13 billion

Source: Company reports

“He showed it off to me with what might pass for childish delight,” analyst Roger Kay of Endpoint Technologies Associates recalled. “A pure geek, in the best sense of the word.”

And perhaps Dell Inc. needed this geek to reclaim sole charge of his consumer-driven company so it could undergo the enterprise-oriented revamp it needed.

Since taking back the CEO’s office from Kevin Rollins in 2007, Michael Dell has been doing little but leading the reinvention of Dell Inc. And one day he may look back at 2011 as a high point in what’s proving to be a bold, even controversial, gambit to become a corporate IT powerhouse.

In sharp contrast to rival Hewlett-Packard, which stumbled badly in its own bid to expand into higher-margin markets, Dell’s tale in 2011 centered on the steady pursuit of a new strategy with cohesion and none of the turmoil that would plague a weaker management team.

For aggressively emphasizing innovation, for branching out into the more-lucrative areas of IT and data storage, and for exemplifying how not to let your boardroom descend into chaos, Michael Dell was named a finalist for MarketWatch’s CEO of the Year award.

“We’re making a pretty fast transformation,” he says in an interview at the corporate campus in Round Rock. “It’s working.”

Famously starting his direct-sales business from his college dorm room, Dell made a name for himself with consumers by being fast and keeping inventory levels low.

R&D by others

But after becoming a big company, Dell spent very little on research and development, and instead rode the innovations of other companies, mainly Intel Corp and Microsoft Corp.

Once a low-margin vendor of PCs denigrated as the Wal-Mart of the technology industry, Dell has turned its attention to building an intellectual-property portfolio and creating a bigger IT-services organization so it can become a player in higher-margin arenas of corporate technology.

It’s a makeover in the image of none other than IBM Corp. But be careful with comparisons to Big Blue. “They have a bit of a head start,” Michael Dell quips, still boyish in his plain shirt and jeans. “I’m only 46 years old,” he adds, now sounding a bit defensive. “Give me a break here. This is a 27 ½-year-old company. I think when IBM was 27 ½ years old, it was a lot smaller than Dell is today — even adjusted for inflation.”

Dell has seen the campaign gain traction in 2011.

“You’re seeing a decline in revenues of reselling things and an increase in revenues in things where we own the intellectual property,” he says. “So you see our margins going up, our profits going up, cash flow going up.”

In 2011 his strategy earned cautious praise on Wall Street.

The company has consistently exceeded analysts’ estimates over the past four quarters. Analysts are taking note of Dell’s improving margins. PCs remain a big chunk of Dell’s sales, but revenue from other higher-margin businesses, such as services and storage, are steadily growing.

Which is why some analysts believe that, last year at least, Dell strengthened its case that it’s on its way to becoming a significant competitor in corporate tech.

Auriga analyst Kevin Hunt noted in a May interview how Dell “was hated by almost all analysts during the past five years, and no one wanted to admit [the company was] doing some good things, despite some fairly clear evidence.”

Acquisitions have played a key role. Dell has bulked up over the past five years, buying 14 companies in various segments, from Perot Systems in IT services to EqualLogic and Compellent Technologies in data storage.

Branded storage

Dell’s data-storage expansion, in particular, has earned positive reviews. In its last earnings report, the company said sales of Dell-branded storage products had jumped 23%, reflecting demand for EqualLogic and Compellent products.

In October, the company opened a new research center in Santa Clara, Calif., in the heart of Silicon Valley. Michael Dell formally opened the 240,000-square-foot facility with California’s godfather of innovation, Gov. Jerry Brown.

“If you’re trying to reinvent your company, where you put it really matters,” says Paul Saffo, a veteran tech-industry observer. “I kid [Michael Dell] that his only mistake was not coming to Silicon Valley when he started Dell.”

That its founder is on his second CEO tour of duty may help explain why Dell’s expansion has been relatively smooth while Hewlett-Packard’s has been rocky and marked by uncertainty about whether it would even keep its PC business.

“H-P has had a number of professional managers, whereas Dell has pretty much had the founder, with one interruption for a professional manager, Kevin Rollins,” says Kay of Endpoint Technologies Associates. “But even when Rollins was in charge, Michael Dell wasn’t far from the wheelhouse. So Dell has had a great deal more consistency of vision and depth of experience at the top.”

And Michael Dell has made a point of ignoring Wall Street so he can steadily execute longer-term plans.

Longer-term view

“There’s a fundamental difference between a company run by a founder and a company run by professional managers,” Saffo says. For one thing, employees working under a CEO whose name is synonymous with that of the company can feel more motivated. “They will say, ‘I’m going to follow that guy because he’s got more at stake.’”

Dell, for his part, says his status as the No. 1 shareholder should assure other investors that he has the company’s best interests at heart as he points the way down a new path. “I approach it from a long-term perspective,” he says. “It’s an owner-operated model.”

And he knows how to steer clear of the kind of boardroom drama that has bedeviled H-P. Dell has added four well-regarded board members since December 2010, including Laura Conigliaro, the respected Goldman Sachs analyst. But nobody doubts who’s directing the action on campus.

“It is the Michael Dell show,” says ISI analyst Brian Marshall.

Early stages

To be sure, the Dell transformation remains in its early stages. Analysts caution that Dell has a ways to go and faces serious headwinds in the near term.

Global economic uncertainty continues to plague the tech market. A hard-disk-drive shortage, stemming from the Thai flooding disaster, is expected to hurt PC sales in the coming year.

And Michael Dell has had his own share of setbacks.

Some say that, had Dell been more innovative, it could have built a stronger consumer business that extended to the mobile computing space and included a vibrant Web ecosystem — similar to what Apple Inc.
AAPL, +1.72%
has created.

“[Michael Dell is] a very smart man,” says Tim Bajarin, a Creative Strategies Inc. analyst. “But through mistakes over the last five years, he lost the opportunity to punch up and grow his consumer business.”

Dell doesn’t challenge that assertion, saying, “It’s hard to argue with that, but I think it really gets back to a matter of focus.”

$2.75 trillion share

That focus, specifically, is on the $2.75 trillion of the $3 trillion global tech industry that Dell says is accounted for by the commercial, enterprise, public sector and other business markets.

“If your question is, ‘When you wake up in the morning, do you focus more on that $2.75 trillion or the $250 billion?’ ” he adds. “We focus more on the $2.75 trillion. It’s 10 times bigger.”

In an interview, former CEO Kevin Rollins said Dell’s push to become a bigger corporate IT player “looks like the right move.”

“The challenge will be that many other tech companies are trying to do the same thing and have a head start,” he adds.

To be sure, Dell’s move away from lower-margin businesses has caused some concern because it has meant slumping sales.

With its last quarterly report of 2011, the company has missed revenue projections for five quarters in a row, prompting analyst Brian Marshall of ISI Group to warn clients to “expect the ‘no-growth phase’ of Dell to continue for a while.”

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